Just paid my auto insurance in full

[disneysteve]

For some reason that I don't even remember, I got in the habit a few years ago of not paying the auto insurance bill in full every 6 months. There was probably some short-term cash flow situation at the time that made me do that initially, but I never stopped. I didn't go monthly but did usually divide the total into 3 payments. But each time I did, I got dinged for a $3.50 fee. I know it was stupid to pay a fee I didn't need to pay, but nobody's perfect.

My latest bill came today and I just logged on to their site and submitted full payment with my Marriott Visa. So I'll save $10.50 in convenience fees over the next 6 months as compared to splitting it into 3 payments. Plus I'll get the usual reward points for using the CC (which I did anyway, even with the split payments).

[LuxLiving]

Not sure for you, but you might want to check - our insurer offers a hefty discount when paying yearly as well.

[disneysteve]

Originally Posted by LuxLiving

Not sure for you, but you might want to check - our insurer offers a hefty discount when paying yearly as well.

Nope, no discount. Just no added fee. And this is for 6 months, not a year.

[LivingAlmostLarge]

I have no fees or discounts for monthly debit. I used to pay in full but why bother when there's no fee or incentive?

[Seeker]

Originally Posted by LivingAlmostLarge

I have no fees or discounts for monthly debit. I used to pay in full but why bother when there's no fee or incentive?

Wow! There's no reason to do so in your case.

My company wants me to pay $5 per month more to break it up into 6 monthly payments, so I too have been paying the six month premium in full without fees. I don't think I can make +$30 to make it worthwhile to break it up.

[maat55]

With AAA, if I don't pay the 6 months in full I have to pay 10% more. I would move to another ins., but I can't find one cheaper.

[LivingAlmostLarge]

Triple AAA has fantastic service though Maat55. In CA I used them and paid in full 1 year. Now I just debit it because MA is fixed insurance prices by the state. So they don't really care how they get paid.

[InDebtInDC]

You already know paying insurance premiums in bulk drives me crazy. Why would you do that rather than just pay the installment fees?

[sweeps]

DC, if I paid installments, I would pay an extra $21 on a $500 bill. Why would I do that?

[LuxLiving]

My installment fee would be $24. No thanks.

[InDebtInDC]

Originally Posted by sweeps

DC, if I paid installments, I would pay an extra $21 on a $500 bill. Why would I do that?

Originally Posted by LuxLiving

My installment fee would be $24. No thanks.

Same answer for both of you. Like I've said many times before, should you cancel your policy before the coverage term expires, you're likely to get less than what you thought a prorated rate should be.

If nothing else, it's always better to stop paying the installments than to try to get a partial refund from a lump sum payment. It's one small way that insurance carriers try to take advantage of insureds.

Now this is speaking from my experience in the insurance industry, and does not represent practice for every carrier, but I would still venture to say that at least a portion of my arguments hold for the majority of major insurance carriers.


If you disagree, please post the algorithm insurance carriers use to calculate your prorated refund.

[LuxLiving]

On homeowner's I'm pretty positive we're staying put thru the end of the paid year. Of course we'll be shopping rates again in a few months when it's time to renew and this point of how payments are received & charged for will be one of the pricing points I'll be covering in our questioning.

[InDebtInDC]

Originally Posted by LuxLiving

On homeowner's I'm pretty positive we're staying put thru the end of the paid year. Of course we'll be shopping rates again in a few months when it's time to renew and this point of how payments are received & charged for will be one of the pricing points I'll be covering in our questioning.

With homeowner insurance I understand, but with auto there is more flux in your personal situation so it's more likely for mid-term policy cancellations.

[LuxLiving]

Yep, we had that happen to us ONCE on the cars. Never again.

My apologies, since my coverage on both cars and houses is with the same company I just started chatting disneysteve up on the discount available on the houses as if I was talking about auto coverage. Apples and Oranges. Duh Lux, read the thread!!

[sweeps]

Originally Posted by InDebtInDC

If you disagree, please post the algorithm insurance carriers use to calculate your prorated refund.

I don't have the algorithm obviously, but I've canceled policies before and as far as I can remember, I've gotten the full prorated refund (down to the day).

Worst case, say you have to pay for a full month. You'd have to pay that full month whether you were paying monthly or you were paying for the full term, right? So the full-termers wouldn't be losing anything, and in fact they would not be paying that extra "convenience" fee.

[InDebtInDC]

Originally Posted by sweeps

I don't have the algorithm obviously

I know you don't have the information. It would be very very rare if you did. I was just teasing you.

Originally Posted by sweeps

Worst case, say you have to pay for a full month. You'd have to pay that full month whether you were paying monthly or you were paying for the full term, right? So the full-termers wouldn't be losing anything, and in fact they would not be paying that extra "convenience" fee.

I respectfully disagree. For a policy with 6 monthly payments, and you stop in x months, where x is a positive integer less than 6, and a portion of the next month:


Monthly payments total payments:
(x+1) X (monthly payment + monthly installment)

At most, you lose (monthly payment + monthly installment)

Lump sum total payments:
6 X monthly payment

At most, you lose (6 - x - portion of month) X monthly payment


Assuming that the probability and percentage of refund is 0%, for x less than 5, you risk losing more money with the lump sum because you do not know how much you can get back.


If you are 100% certain that you will get back your exact prorated premium, then the lump sum is a better way.


For anything between 0% and 100%, it's a judgement call on your part. For a $24 mark-up, I gladly take the installment approach to eliminate the risk of losing more money.

This is the more conservative approach, and should become more viable the higher your premium becomes, but it ultimately depends on you.


This is even before factoring in opportunity cost had you invested the money. When you add this in, the scale of evidence tips more favorably towards me.

[sweeps]

I guess we'll have to agree to disagree. There's no way if I cancel my policy 3 months into the 6 month term, I'm losing 3 months of premium. If that were the case, practically no one would pay in full.

If you were saying that if I canceled 2.5 months into a 6 month term, I would lose that half a month of premium, I might believe you, but again that's going to happen whether you're paying monthly or in full.

Also I haven't mentioned that (1) it's much more convenient to pay it once every 6 months on a credit card and not send in payment coupons every month (don't forget the stamps), and (2) canceling a policy mid-term is going to be a pretty uncommon occurrence.

[InDebtInDC]

I don't think there is any disagreement.

As I outlined above, your situation is as follows:

a) insured intends to carry out coverage to policy's end;
b) insured values convenience of lump sum payment.

There is low probability of mid-term cancellation so proration isn't even an issue.

But what about opportunity cost? This is the only thing left that you haven't addressed.

send in payment coupons every month (don't forget the stamps)

You still mail in payments? It's cheaper and faster to do automated payments.

[sweeps]

Yes, I thought of opportunity cost. Let's say you're very lucky and can get a guaranteed 5% return. Using my example, I pay $504 if I pay for the full term. I have to pay an extra $3.50 each month if I go monthly (not counting the extra stamps and inconvenience), for a total of $21 in fees.

You might think I could earn $12.60 by banking the money ($504 * .05 * .5), which even if true doesn't compensate me for the fees. But wait -- it's worse than that -- the principal is going down each month by $84 PLUS that $3.50 convenience fee.

When I do a quick calculation in Excel, I figure I would earn $5.03 in interest over the 6 month period by paying monthly. Take out taxes from that, and maybe that leaves you with $4.50 -- that doesn't come close to compensating me for my $21 in fees.

[InDebtInDC]

Again, for your specific situation it may not be worth it.

My installment fees are fixed at $1 per month regardless of the premium. As the premium increases, there will be a breakeven point, somewhere around $2,000, and after that it's better to go with installments.